Kiva the Disrupter

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When Mick Mountz set out to build Kiva Systems, he knew he was attempting to disrupt long-standing incumbents in the material-handling industry—and he succeeded. There is no question that the company’s armies of mobile robots upend the normal pick-and-pack process in an online retailer’s warehouse.

But Mountz explains that it wasn’t enough to envision the novel approach, invent the required technology, and make it commercially viable—he had to do much more to help customers take on the risk of buying an unprecedented solution. He had to price it in a way that made his company, not the customer, bear the risk. He had to provide all components of the solution so that Kiva would be 100% responsible for its performance. And he had to design his organization to deliver the entire customer experience—from initial marketing contact to after-sales service.

It all adds up to a daunting proposition for a new company—and begins to show why disruption is so hard to pull off. When a company must defy so many of its industry’s norms to change the game, it’s out there to sink or swim on its own.

Back in 2003 I spent a good deal of time traveling up and down Sand Hill Road in Menlo Park, California, talking to venture capitalists and hearing nothing but “no.” I must have explained my new idea to at least 50 prospective investors. It was the notion that, in a warehouse dedicated to picking and packing e-commerce orders, a company could save workers a lot of running back and forth fetching items from the shelves if it had a small army of robots bringing the shelves to them. This was a solution that wouldn’t have been viable a couple of years earlier, but with emerging mobile robotics it suddenly was—and it had the potential to disrupt the world of material handling. The VCs, however, just weren’t getting it.

Ten years later, our solution has become a favorite among top e-commerce retailers. Thousands of our bots have been deployed in fulfillment centers by Staples, the Gap, Walgreens, Saks Fifth Avenue, Toys “R” Us, Follett, Timberland, Diapers.com, and Dillard’s. If you saw our robots in action and thought about all the expensive, exhausting, and unproductive effort they eliminate, you might say, “Why didn’t I think of that?” If your business depended on filling high volumes of orders fast and accurately, you’d take a hard look at Kiva Systems.

Still, in 2003 even I knew why VCs weren’t biting. They looked at Kiva and saw a company that was complicated, because it was both a software and a hardware business. Software they liked. In fact, I remember potential investors saying to me, “You’ve got so much data at the heart of this thing. Can’t we just sell the data?” (We couldn’t. We needed to physically move inventory around the warehouse to create value.) The part of the solution that scared them was the robots, which required a potentially substantial—and, they thought, risky—investment in engineering and manufacturing hardware. “You’re going to need $100 million just to get to cash flow breakeven,” they’d say.

Ultimately, once we had a proof-of-concept system in hand, a private round of funding got us off the ground. Thanks to a well-developed idea and disciplined execution, we made it all happen with just $33 million. But in terms of having to put ourselves in other people’s shoes and allay their concerns about risk, talking to investors was only the beginning: We still had potential customers to persuade.

It’s Not About the Bot

When management theorists talk about disruptive innovation, they usually focus on the offering. The assumption is that customers gravitate toward a superior value proposition, whether it’s a “good enough” solution that’s far cheaper than the incumbent’s product or an elegant innovation devised through out-of-the-box thinking. Build a better mousetrap, the saying goes, and the world will beat a path to your door.

If only it were that easy. Unfortunately for the would-be disrupter, developing new technology and designing a product that will do a better job for customers are only the first steps. A lot of other work goes into delivering a breakthrough solution. As we discovered, it often requires an industry-defying approach to doing business and an extraordinary commitment to ensuring that customers gain the benefits they’re seeking.

The idea behind Kiva Systems occurred to me because I had been at Webvan, an early e-commerce venture that hoped to make online grocery shopping with home delivery commercially viable. I had been brought in to rethink the warehouse operation and had seen firsthand the inefficiency of the prevailing model. In a fulfillment center, 70% to 80% of the labor is devoted to picking and packing. And 60% to 70% of a worker’s day is spent walking among the shelves. Do the math, and you find that about half of what a company is paying for is time spent walking. Given the razor-thin margins of the grocery business, that inefficiency contributed to the death of Webvan.

By 2002, however, mobile robots were starting to pop up. That was the year, for example, when iRobot introduced the Roomba: a robotic vacuum cleaner for the consumer market. Raffaello D’Andrea, an engineering professor who would become one of Kiva’s technical cofounders, was sending autonomous robots out to compete on soccer fields. The Cornell robotics team he sponsored kept winning something called the RoboCup. Our other technical cofounder, Pete Wurman, was a professor of computer science at North Carolina State specializing in complex adaptive systems and advancing the art of agent-oriented software. It was becoming clear that robots, combined with sophisticated software, could do interesting things. So an entrepreneurial business guy, a hardware controls expert, and a software architect stacked hands and got to work.

You can probably imagine how some of our early sales calls went. “Hundreds of mobile robots? That’ll never work. How would you control them? They’ll cost too much and be too complicated to operate.” But I knew I had a solution customers would love once they saw it. I had done my homework. I remember telling my friends, “I am going to talk to 10 companies, and if I can get three to say they’d be interested in this new solution, I will incorporate and start looking for funding.” I managed to meet with eight, all of whom said they would consider the system—if it existed.

As it turned out, even an elegant solution with a great ROI was not enough to close a sale. To understand why, first consider how our primary buyer might see the opportunity. The senior vice president of operations is the executive on the hook for order fulfillment, so if it becomes more efficient, he or she wins. On the other hand, given that our solution could involve tearing out the system that’s already in place, the SVP is acutely aware of the risk. “What you’re asking me to undergo,” one prospect told me, “is like a heart–lung transplant for my fulfillment center.”

Now add to that uneasiness the fact that the typical cost of a Kiva system is $4 million to $6 million and that the SVP will need to persuade the CFO and the CEO to make this capital expenditure a priority. What quickly became clear was that we had to reduce the uncertainty and risk of the investment. The first, easiest way we could do that was in our approach to pricing.

Relieve Customers of Risk

For any customer experienced with multimillion-dollar automation projects, Kiva’s pricing model and billing process seemed radical. We boiled it down to just three fixed-fee invoices, with the first payable on signing, the second on installation, and the final on acceptance. That was it for the charges the customer saw; we guaranteed that there would be no nickel-and-diming for cost overruns and no change-order fees. What’s more, we guaranteed right of return for full refund at any point up to final acceptance. And we spelled out acceptance criteria in terms of the business results that matter to the customer, such as orders per day or units per hour, rather than machine specs having to do with the speeds and feeds of our equipment.

These moves were unheard of in the material-handling industry—and, by the way, it wasn’t easy to get our board aligned on them. As a group, we directors had to agree that we would enter into large capital contracts, and commit resources and materials, knowing that in the end the customer might reject the whole solution and ask for a refund. But in my mind, the risk of that was very low, and the upside was that our guarantee would help overcome decades of vendor mistrust and scar tissue that had built up among customers over failed automation projects.

We simply removed any financial risk associated with the capital expenditure. That not only had the obvious impact on the attractiveness of the investment but also changed the tenor of the buying decision in the customer’s organization. Capital expenditure decisions are always complicated by uncertainties and competing demands. But when an operations SVP is able to say to the CEO, “Yes, it’s $5 million, but we have full right of return,” the discussion shifts to a straightforward consideration of return on investment. And ROI is a debate that Kiva can easily win.

Deliver the Whole Solution

One of the reasons we were comfortable with a pricing approach that shifted much of the risk to Kiva was that we were designing, manufacturing, and delivering all aspects of the solution ourselves. Because our fate was in our own hands, we had tremendous confidence that the system would work. When you’re trying to show the world that an utterly unconventional approach is superior, it has to deliver on that promise the first time out. We knew if the system failed for any reason, our competition would run with that news to create fear, uncertainty, and doubt about us in the marketplace.

Taking on so much accountability was another break from the traditional world of material handling. Companies in this industry are generally hardware equipment vendors or software application providers. And most hardware companies specialize deeply in a subclass, such as conveyors or carousels. Few firms have the hardware-engineering, software development, and integration expertise in-house to provide complete solutions.

For Kiva, taking that on meant making more than the robots, the shelving pods, and the stickers that go on the warehouse floor to guide the robots. Our engineers tackled every technical detail, from the image-processing algorithms used in navigation to the touchscreen user interface that allows an untrained operator to step into a pick station and be productive in minutes. We had to engineer the robot from scratch for this specific purpose (although, naturally, we used commercially available off-the-shelf parts wherever appropriate). And on the IT side, we pulled together a dedicated high-availability fault-tolerant server to run our software control application. On the day we deliver our bots, we roll this server into the customer’s warehouse and plug it in. And then we’re up and running.

Trying to Sell Customers on Disruption? Put Yourself in Their Shoes

The solution might not be as blindingly obvious to them as it is to you.

In Kiva’s case, the problem being targeted—the amount of time and energy wasted as order-pickers walked miles through vast warehouses—was so ingrained that many potential customers assumed it couldn’t be solved. Be prepared to answer skeptical challenges to your idea in call after call.

It’s one of many candidates for investment.

Especially when a purchase means a major capital expenditure, your customer has to make a strong case for it to the CEO. Kiva helped by offering a full-refund guarantee, allowing that internal conversation to shift quickly to the question of ROI.

It looks awfully risky.

For one Kiva customer, the prospect of pulling out its old system, which was more or less working, and installing a new one was akin to a heart–lung transplant. Your sale will go nowhere unless you can make adopting the innovation seem less risky than sticking with the status quo.

It has a lot of moving parts.

In many industries, customers have to cobble together solutions by drawing on the strengths of multiple vendors. If one weak component can destroy the value of your innovation, it may not be worth the risk of leaving any part of it to firms less committed to its success.

Adopting the new solution will be a long journey with many handoffs.

Customers are happiest when they don’t have to engage a new party at each phase of the transformation effort. Kiva decided to provide continuity throughout the journey, stitching together an end-to-end process that appeared seamless to the customer.

They aren’t used to working with start-ups.

Some organizations simply lack the flexibility to be early adopters. Look for companies that expect innovation from their supplier base and have the capacity to work with you creatively.

The beauty of this complete-solutions approach is that Kiva can deploy quickly into any warehouse setting, and the system just works. For customers, the installation experience is mind-bending. The industry is not accustomed to seeing complex automation projects come to life easily and work correctly the first time. This rapid deployment capability has even given our customers a new kind of flexibility: automation that can move with them. There are all kinds of reasons a company might wish to relocate a distribution center: rising oil prices, local economic conditions, natural disasters, transportation infrastructure problems, mergers and acquisitions, labor demographics, faster-than-expected growth. Wouldn’t it be great if you could just pick up your warehouse automation and drop it into another building? Kiva customers now routinely move their distribution centers. Some have even done so over a weekend without missing an order.

Make the Customer Experience Seamless

The fact that our solution was so easy to deploy led us to yet another radical departure from standard practice in our industry: Even as a tiny, zero-million-dollar start-up serving multibillion-dollar customers, we decided to take full ownership of the customer experience. That is, we made sure that at every step in the process—from learning about our offering to getting it installed to maintaining it—a customer would deal with Kiva.

Compare this with the typical experience, in which a customer engages a consultant to design a fulfillment center, several vendors to build the material-handling pieces, a software provider for the control system, a systems integrator to try to glue it all together to match the consultant’s original concept, installers, and third-party maintenance firms to keep everything running. Dealing with this many organizations is not unusual, despite the fact that customers prefer a single point of accountability. The challenge is that whenever success depends on the interrelated contributions of multiple parties, you have an “N-squared” problem: The coordination complexity rises dramatically with each additional party. Everyone ends up spending more energy on unproductive conversation, finger-pointing, and follow-up about who said what to whom than on getting the system live and solving the customer’s problem.

To reinforce that everyone at Kiva plays a role in the customer experience, we structured our organization to reflect the steps involved in it. Rather than hire someone into a function such as marketing or R&D, we refer to the departments by their role in the process: Tell It, Sell It, Design It, Build It, Deploy It, and Support It. This action-oriented flow reminds us that it’s all about converting interested prospects into happy users by ensuring smooth handoffs for them. Providing even more continuity, we assign a Kiva account manager to act on the customer’s behalf. And the account manager is there at the most important point of the selling cycle, long after the initial sale, when the customer’s business is booming and it needs more of what Kiva sells. (Fully 80% of our customers have expanded their Kiva system over time.)

When a company covers every step of its customers’ experience, it can make high-impact investments at points along the journey that would be uneconomic if it were providing just one link. For example, during equipment installation (the hard job of getting the warehouse prepped, shelving built, networks installed, and robots running), most vendors rely on time-and-materials field installers under contract, who are generally on the clock the whole time they’re on-site. When it’s a Kiva system, the installers are more likely to be engineers from Kiva who will work in the distribution center for 20 hours straight if that’s what it takes.

Managing the entire experience ensures smooth handoffs for customers. It is also the best route to continuous improvement.

Another example of investing in the customer experience—and a perennial topic at our planning retreats and board meetings—is that we have chosen not to manage Kiva’s installation and ongoing maintenance services as profit centers. Our goal with these services has been to provide for a great customer experience while simply covering our costs—a perplexing decision to any number of people inside and outside our organization, who see focused service providers operating very profitably in both spaces. But that is not our business model, and it makes more sense when you realize that our revenue mix and growth are dominated by selling profitable systems, and the services are a small but necessary part of making the system experience great.

Managing the entire customer experience offers one final benefit: It is the best route to continuous improvement. Inherent in our solution is the fact that it can evolve. It is a hardware solution driven by a sophisticated software control system. This inverts one of the most basic facts of traditional warehouse automation. A conventional conveyor system is the best it’s ever going to be on the day you install it. Thereafter, it’s a steady march to obsolescence. With Kiva, what you get on day one is the worst the solution is ever going to be, even though it meets your needs that day. Because our system is based on software, it will keep getting better with each new release, thanks to improved workflows and algorithms. (The incremental improvements can add up quickly. One of our customers hadn’t updated its software for a year and a half. When it did, it got 10% higher hourly throughput from the exact same equipment.) We find those opportunities for improvements by remaining involved in our customers’ operations. We gain valuable feedback, act on it, hold ourselves even more accountable, and exceed expectations.

By dispensing with industry conventions and well-established relationships, you isolate yourself and are forced to sink or swim.

Culture Matters

Kiva is a high-tech start-up in a world of old-school equipment manufacturers, and our strong culture permeates and enables everything we do. We start with our customers’ business problem from their perspective and work alongside them to find the right Kiva solution. We anticipated that competitors would go from ignoring to discrediting to attacking us, and we thought about all this when we went through the exercise of defining Kiva’s culture. In documenting our core values, we decided to describe what kind of person was a great Kivan—competitive, innovative, friendly, customer focused, fast, results driven, grounded, flexible—and how the company needed to operate to disrupt this industry.

Disruption takes a measure of persistence. After 10 years building and delivering on our vision, we were acquired by Amazon. [Editor’s note: That purchase, one of Amazon’s largest, was made in May 2012 for $775 million.] Because we know Amazon to be a true innovator in e-commerce operations as well as a player of tremendous scale, we saw this move as the ultimate validation that we had, in fact, changed an industry. But Kiva’s experience also makes it clear why disruptive change is so hard to pull off. We not only needed to devise a clever new solution to an important customer problem; we had to think very hard and make bold decisions about how we were going to deliver our solution. By dispensing with industry conventions and well-established relationships, you isolate yourself and are forced to sink or swim.

A final critical factor for the would-be disrupter is the first few customers it lands. Choose them wisely, because those encounters have a surprising power to define a company from the outside in. Staples was the first to sign up with Kiva. We knew that we would learn a lot from its fulfillment group, considered one of the best and most professional in the business. But what turned out to matter most was that Staples had a trust-based culture and was trying to execute on a “good to great” path. I recognize now that the customer’s culture determines in large part whether changing industry norms will be easy or hard. Staples was probably more open than most retailers would have been, whether we were offering our novel pricing approach or asking to deploy untested code in its building. I would say the same about our other early customers. Walgreens and the Gap both understood how to work with a start-up. They didn’t just say, “I’m a buyer and you’re a vendor, and here are the terms we use with all our material-handling suppliers.”

Each of the decisions described here proved fundamental to Kiva’s ability to challenge a $10 billion market for automating material handling. It’s now hard to imagine how we could have delivered our breakthrough solution any other way; our choices seem obvious in retrospect. Yet each was risky, ran contrary to convention, and gave our investors plenty to ponder. It all started with a clever idea, but that was the easy part. In the end, we’re a much bigger story than the robots. It’s bold execution on new business approaches that makes Kiva a successful disrupter.

Mick Mountz is the CEO and founder of Kiva Systems, in North Reading, Massachusetts.

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